I got an email this weekend about a potential interview for a fund of funds position. It’s a small boutique firm so they want me to just come into the office and meet the people directly. I started doing some research on this forum as well as on google, and I’m trying to find the best answers for these.
What type of skills and experience would I want a manager to have as I conduct due diligence?
How would I measure the success of a manager and what would I consider to be red flags?
What is a potential investment that is worth looking into in this economic environment?
Anyone familiar with fund of funds mind helping me into the right direction?
1- experience in the field he invests in. Skills vary depending on the type of fund, but deep fundamental research skills on the accounting side are always a good place to start.
2-obviously past returns are an easy way to see if the “proof is in the pudding” but you need to strip out any Beta the manager has in his returns to see if he has consistently generated alpha over the years. Compare to peers in the industry over the time period as well.
Red Flags - these are all over the internet. Easy to find answer to this one. From investment side - if there is style drift based on past exposures, etc… From the operational side, if the AUM is made up of one or two huge investors, if the service providers are relative unknowns, if the illiquid assets are priced by the firm alone, etc…
3- Personally I think the L/S Credit space is an interesting place to be, as the volatility in that sector picks up, there will be ample opportunity for good credit guys. Just make sure they aren’t sitting on a ton of basis risk (i.e., shorting the junk and longing the AAA).
I have been doing manager research for 5 years now, and really am starting to hate it. It isnt’ a bad place to start in the investment profession in your early 20’s. but after hearing hundreds of fund ‘pitches’ I just glaze over at this point.
I don’t think anyone can really be “skilled” at manager selection unless they have been a HF manager themselves. Even then it’s a crapshoot. The one thing I will say it is good for is to prevent Madoff-type things from happening to your clients.
I am desperately trying to break out of this and into equity research now.
I very much agree with this. If someone has never been done fundamental research and looked at stocks from the bottom up… I probably wouldn’t be comfortable having that person pick good asset managers for me. The immense experience being in equity research watching the markets/ making stock calls, you learn a ton, you can better understand the lingo of asset managers and ask the right questions on how they view stocks, the markets, and how they invest.
^ totally agree with this. And for this reason I think the opportunities to switch from HF to FoF are generally much more plentiful than vice versa. But I guess for people that enjoy direct investing and haven’t been worked to the ground yet, they probably are much more likely to want to stay in HF because of upside potential even though FoF has much more of a chill lifestyle. Seems like a tough space though given overall pressure on fee structures and disintermediation risk.
Also, generally good post on FoF by PistolPt by the way.